Sunday, January 31, 2010

NTPC FPO & Stock Analysis

NTPC is one of the better bets among power stocks. Though it has grown at a sedate pace over the last five years, NTPC is likely to deliver better earnings growth over the next decade.NTPC is one of the better bets among power stocks. Though it has grown at a sedate pace over the last five years, NTPC is likely to deliver better earnings growth over the next decade. Our valuations, on an estimated fair price-to-book-value of 3, support a price of Rs 204 a share with a built-in upside of 20 per cent.

Investors can consider subscribing to the follow-on public offer (FPO) if it is priced at Rs 204 or below. At current market price of Rs 214, the stock is trading a 17 times its estimated FY11 earnings. NTPC may increase its capacity by a third by the end of 2012 after we account for possible delays in execution. The Central Electricity Authority estimates that NTPC may add 10,020 MW to its current capacity of 31,144 MW in the same period.

On current reckoning, the company may end the current Plan period achieving 62 per cent (13,940 MW) of its targeted capacity. This would be higher than its previous Plan period addition of 7155 MW, allowing for higher topline expansion over the next three years.

Equipment delays and execution risks continue to be major hindrances, though. Delays in ongoing projects and the high proportion of cash in the book (Rs 20/share) continue to weigh on its Return on Equity (ROE). Delays in some of the upcoming projects would also entail a loss of the 0.5 per cent additional ROE incentive on tariffs proposed by the Central Electricity Regulatory Commission (CERC) to encourage timely execution.

However, NTPC may still manage some improvement in ROE over the next few years, given the recent increase in regulated tariffs proposed by the CERC. New merchant capacities expected to be commissioned at Korba (500 MW) and Farakka (500 MW) may also aid higher ROEs.

Upside due to regulatory changes such as sale of unallocated power through the merchant route also holds potential for better returns over the short-to-medium term.

BusinessNTPC, a public sector utility, is the largest player in the power sector with around 31,144 MW of capacity under its belt, including 2294 MW owned through JVs. The company is amongst the better operating utilities, given that it contributed 28.5 per cent of the total electricity generated in the country last year, with only 19 per cent of the total capacity.

It has been consistently maintaining its plant load factor (91.4 per cent as of March 09) and plant availability factor (92 per cent as of March 09) at higher than normative levels and thereby earning incentives.

Funding: ComfortableA comfortable funding position is the biggest strength for the company, even as private players grapple with financial closure.

The company has a debt: equity ratio of 0.64 per cent for the year ended March 2009, thanks to a high equity contribution in the earlier projects. However, with the normative debt-equity fixed currently at 70:30, the company may witness increase in leverage and large proportions of cash (equity) may continue to lie unutilised, waiting to be invested.

The increase in debt is not a threat as the interest component will be passed through to customers. For the year ended March, 2009, the average borrowing costs stood at a moderate 7.2 per cent for the company.

NTPC had Rs 17,431 crore in free cash as of Septmber 2009, enough to comfortably fund the equity for more than 15,000 MW of the planned 25,000 MW capacity (in addition to 17,900 MW which are in various stages of commissioning). Given that internal accruals continue to be high, the free cash will only grow further. This may come in handy for the company to finance its backward integration into coal mining and to fund acquisition of mining assets.

The company also has Rs 11, 400 crore of One Time Settlement Scheme bonds issued against receivables. NTPC intends to invest more than Rs 40,000 crore in the next two years, in addition to the current Rs 30,613 crore deployed in capital work-in-progress. Stable cash flows

NTPC's profit grew at a rate of 9.6 per cent compounded annually over the period 2004-09. During the same period, power output grew at a modest annual rate of 6.7 per cent.

However, with newer capacities coming up over the last 18 months and existing plants operating at higher levels, NTPC's profit after tax growth has improved — for the nine months ended December 31, 2009, improved by 11 per cent year-on-year. Unlike private power producers, NTPC is largely dependent on domestic sources of coal from Coal India and its projects carry negligible fuel risk.

The company has signed a new coal supply agreement with Coal India in May, 2009 for the next 20 years for 12 out of the existing 15 power plants with a penalty clause if there is short delivery (trigger level at 90 per cent).

NTPC also has captive mines which are expected to be operational by FY12. Overseas acquisitions of coal mines, along with committed coal linkages may also reduce the dependence on imports.

In FY09, imports made up a little over 4 per cent of the company's coal consumption. Availability of gas from the KG basin would improve the load factors for the company.

Enhancing the value chainThe power trading arm of NTPC is the second largest in terms of market share in short-term trading. It also holds a minor stake in Power Trading Corporation, the largest power trader.

The company is already a seasoned player in operation and maintenance of power projects and is taking up projects for renovation and modernisation and life extension for third parties.

While the company is planning to diversify its fuel mix, most of its hydro projects are delayed and may be commissioned only in the Twelfth Plan. It has formed a JV with NPCIL for 2,000 MW of nuclear power and is also diversifying into renewable sources.

The company has recently formed a JV with BHEL for engineering and a forgings and casting JV with Bharat Forge to reduce equipment delays.

Other concernsWhile the stricter operational norms mandated by CERC augur well for an efficient utility such as NTPC, CERC has discontinued advances against depreciation and disallowed the pass through of tax on income , which could pose a downside to tariffs.

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